As Asia rebounds rapidly from the depth of the global crisis, India's growth is expected to accelerate to 6.5 per cent in 2010 from 5.33 percent in 2009 on the back of strong domestic demand, the International Monetary Fund (IMF) said.
"In particular, the normalisation of financial market conditions is expected to support a rebound of private investment, sustaining demand even as the fiscal stimulus wanes," it said in the latest Regional Economic Outlook (REO) for Asia and the Pacific, released in Seoul Thursday.
Noting that there will continue to be significant differences in growth patterns within the region, IMF forecast Asia's growth as a whole to accelerate to 5.75 per cent in 2010 from 2.75 percent in 2009, both higher than previously projected.
"The primary driver of Asia's recovery has been a progressive return towards normalcy following the abrupt collapse in global trade and finance at the end of 2008," the report said.
"Just as the US downturn triggered an outsized fall in Asia's GDP because international trade and finance froze, now their normalisation is generating an outsized Asian upturn."
This development confirms that Asia has not decoupled from the rest of the world, the REO noted.
Noting that global conditions are expected to continue to improve gradually in 2010, the report forecasts that output in the large G7 economies would grow by 1.25 per cent next year, recouping only half the contraction estimated for 2009, because private demand in these countries remains constrained by the legacy of the crisis.
Consequently, overseas demand for Asia's products will remain subdued, keeping the region's growth well below the 6.66 percent average recorded over the past decade, it said.
By contrast, emerging Asia, in particular China and India, are rebounding much more quickly. Sizable monetary and fiscal stimulus and the rebound in global risk appetite have underpinned the striking recovery in emerging Asia, the REO said.
With Asia's economic landscape changing significantly since the May 2009, Australia and the three economies with larger domestic markets in emerging Asia - namely, China, India, and Indonesia - experienced smaller downturns and are now returning to their earlier, relatively high growth rates, the report said.
In some countries, such as China and India, fiscal and monetary stimulus has supported continued growth in total fixed investment.
Inflation should remain generally subdued, the report said, "but a pickup in core inflation and inflation expectations suggest that demand pressures are already playing a role in pushing up inflation in India."
"At the same time, an upside risk to the nearterm outlook is a more rapid improvement in financial conditions, both abroad and in the region."
"In particular, in India, there are upside risks to growth projections for both this year and the next as signs of recovery are broadening and the adverse impact of the monsoon is likely to be smaller than anticipated," the REO said.
In a few special cases, however, the recovery is advancing so rapidly that output gaps are already starting to close and pressures are already emerging, it said noting, "In India, for example industrial production is recovering rapidly, and core inflation and inflation expectations are rising."